What Can You Expect to Gain From a 1031 Exchange?

The biggest and most important question taxpayers ask themselves before doing a 1031 exchange is "what can I expect to gain from this transaction?" That's our question for today's 1031 education article.

Defer Your Capital Gains

The primary benefit that you gain is that you are deferring indefinitely the capital gains and state income tax liabilities that you would ordinarily have if you were recognizing the gains on the sale of property.

1031 says that no gain or loss shall be recognized if you dispose of a property that's been held for a qualified purpose (investment or business purposes), and you acquire a like-kind property that’s also going to be held for investment purposes. The gain for you is that these profits are not taxable in the current year of disposition and may stay deferred indefinitely.

Avoid Unnecessary Taxes

So the big gain is that you don't have to pay taxes unnecessarily upon the sale of your relinquished property and you defer those gains and roll them into your new replacement property, which may never be sold. If it is disposed of, it may be disposed of after your passing, so that your heirs will have that property with a stepped up basis, effectively eliminating the tax perpetually.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

The Importance of Keeping 1031 Exchange Funds Separate

Consider the following 1031 exchange scenario: A taxpayer is considering a 1031 exchange out of farmland and into a residential rental property. The replacement property may be of greater value than the relinquished property. Can the rental percentage be prorated according to the amount of the relinquished property and the remainder be used for personal use?

Keeping 1031 Funds Separate

The funds from the sale of the relinquished property should be used exclusively for the purchase of qualifying like-kind property that is held for investment or business purposes.

It may be possible to by a two or three unit rental property and to bifurcate it for part 1031 and part personal use. However, it is important to use non-1031 funds to pay for the personal use portion.

Further Reading

For further reading on this topic, please follow the links below:

• Step-by-Step Description of the Typical Exchange Process

• Copy of our 1031 Brochure

Start Your 1031 Exchange: If you have questions about 1031 exchanges of rental property, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Can I 1031 Exchange a Property that was Originally Intended to be a Rental?

A client of ours recently came to us with the following situation. The client had an investment property that was originally intended to be a rental, but after going through renovations they felt like it might make more sense to sell. Could this qualify for a 1031 exchange?

Maintaining the Right Mindset

The simple answer is yes. If you have maintained a mind-set to hold the property for a qualifying purpose of “investment or business purposes,” then you could continue with a 1031 tax deferred exchange.

There is no minimum required period of time that the relinquished property must be owned. For the IRC 1031 to qualify, you must have had the intention (before closing) of holding property for investment or for use in a trade or business.

Tax Treatment of Repairs and Improvements

The client was also concerned about how all the money they put into the property in repairs and improvements would be treated from a tax perspective.

These amounts may be tax-deductible in the year incurred if they are deemed repairs. Conversely, they may be deemed as capital improvements which would increase the client’s basis in the property and are recouped more slowly through depreciation.

It is always a good idea to talk to your accountant about the proper tax treatment for these expenses. Generally, you are not allowed to reimburse yourself for these repair costs with 1031 funds at closing (without adverse tax consequences).

• Start Your Exchange : If you have questions about 1031 exchanges of rental property, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Determining Gain with Gifted Property

Determining capital gains taxes on property can be especially difficult when the property in question was a gift. In this article we will explain how to determine your gain when you receive a gifted property, and when a 1031 exchange is a good option.

When Your Father Gifts a Property to You

If your father gifts property to you, then you may take a carry-over basis (his basis) in the property received by gift during his lifetime. See IRC Section 1015 (for intervivos gifts made during the grantor's lifetime, Taft v. Bowers, 278 U.S. 470 (1929)) and also IRC Section 1014 (for inheritance for a deceased person).

You may need to find out how low your father’s basis is, because that may be your basis received in the property if it is made during your father's lifetime.

Gain is generally determined by subtracting your basis from the net sale price (amount realized) on the sale.

1031 Like-Kind Exchange

If you want to defer the gain, you may consider doing an IRC Section 1031 like-kind exchange.

In order to qualify for a 1031 exchange, both the property given up (sold) and the new properties received must be held for investment / business or for use in your trade; so you may need to hold the gifted property for one of these qualified purposes for a period of time before exchanging out of it.  

• Start Your 1031 Exchange: If you have questions about gain with gifted property, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Tax Reform & The Importance of the 1031 Exchange

There are a lot of rumblings out there about potential tax reform. President Trump has talked openly about how he wants to lower federal corporate income tax rates from 35% perhaps down to as low as 20%. How do we pay for this reduction in tax and the simplification of the tax code?

1031 on the Chopping Block?

Some pundits have speculated that section 1031 could be a victim of federal tax reform, thinking that Congress will throw it out in an attempt to simplify the code and to create some revenue raisers to offset these reductions in other areas. But throwing out section 1031 would likely have the opposite effect.

Market Stagnation

Let’s start with the assumption that 1031 elimination would result in more tax revenue collection. The result of eliminating 1031 would be stagnation and decreased velocity in the marketplace. I don't care if you lower rates down to 5%, a lot of our clients are just adamant that they don't want to pay any taxes on the sale of their real estate. They do not want to give away their hard-earned equity, and they will stay locked into their current properties and never sell them if they are going to get slapped on the wrist with this disincentive called taxes.

Without 1031 there is no tool to allow people to move their capital to the most advantageous investment. That stimulates property values, job growth, and has an unusual effective of benefiting the entire economy because capital is moving to different geographic areas around the country and into different business segments where it's needed.

• Start Your Exchange: If you have questions about 1031 and tax reform, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved